Liquidity is Improving in Asian Fixed Income
The latest global investor survey on Asian fixed income by Eastspring Investments, the Asian asset management business of Prudential plc, found that liquidity was a major but improving concern when investing in Asian bond markets.
Survey respondents ranked liquidity as their second highest concern, after corporate government issues. Liquidity has, however, increased significantly over the years in line with the growth of the Asian bond market, pointed out Low Guan Yi, Head of Fixed Income at Eastspring Investments in Singapore, in a recent report.
The market’s current capitalization (USD and local currency) stands at $22 trillion, around 18% of the global total. Since 2006, Asia’s local currency and foreign currency bond markets have grown at a compound annual growth rate (CAGR) of 15% p.a. and 13% p.a. respectively. That said, some markets within the region are less liquid than others.
The average bid-ask spread for on-the-run local currency government bonds in Emerging Asia has fallen substantially from 7.2 bp in 2010 to 2.8 bp in 2019. Even if we were to compare these figures against 2020’s average bid-ask spread (which would have been impacted by the COVID-19 pandemic), the region still shows significant improvement.
Quantitative Liquidity Measures
There is however a wide divergence amongst the individual markets. The more developed government bond markets, such as Korea and China, have bid-ask spreads of 0.4 bp and 1.1 bp respectively, while spreads for the Vietnam government bond market are wider at 5.5 bp. The liquidity of China’s government bond market has improved following its inclusion in the Bloomberg Barclays Global Aggregate Index in April 2019.
Liquidity in the region’s local currency corporate bond market has also improved over the years, although bid-ask spreads are wider than in the government bond market. This is largely because pension funds, insurers and financial institutions tend to be the largest investors in the local currency corporate bond market and have long holding periods.
The table above shows that the average bid-ask spread in local currency corporate bond markets in the region fell from 23.7 bp in 2010 to 11.6 bp in 2019. Investment grade and government-related issues typically enjoy higher liquidity. Liquidity conditions differed significantly too across countries with Korea having the narrowest bid-ask spread at 1.2 bp and Vietnam having the largest (70 bp).
Transaction size, another gauge of liquidity, has also been increasing. Bigger transaction sizes reflect the presence of large investors, although the amount of issuance and monetary policies are also contributing factors. On average, the transaction size of local currency government and corporate bond markets in the region have increased over the years. In the local currency corporate bond market, China and Korea enjoy larger average transaction sizes of $8.6 m and $8.4 m respectively, while transaction sizes are smaller in Indonesia ($0.8 m) and the Philippines ($0.3 m).
Qualitative factors can affect a bond market’s liquidity. According to the Annual Bond Market Liquidity Survey conducted by AsianBondsOnline, Emerging Asian local currency government bond markets score well in terms of settlement and custodial processes, but need to work at making more hedging options available for investors. Again, we see that each market has its own dynamics – Thailand for example scores better than Singapore in investor diversity but underperforms Vietnam when it comes to tax treatment.
Assessment of structural factors in local currency government bond markets